"Panic" sets in to the debt markets

If you are a Bill Murray fan, you might recall the moment early in his movie “Stripes” when, having been dumped by his girlfriend, he says “and then, depression sets in”.

This past week, the word that resonated was “panic”, rather than depression. As in: the S&P drops 5% as panic sets in. And despite Larry Kudlow’s rah-rah hectoring, the bulls didn’t do what they are allegedly trained to do and buy on the dips.

This all came about because the debt markets are in panic mode. It’s a particular word, “panic”, and was the precise one chosen by a longtime Bay Street professional to describe to me what is happening on the debt desks around the world.

Institutions have decided to get not just tight with their capital, but stingy. Banks are now being careful with each other’s own funding. A European bank that would normally be able to sell 30 day paper to a North American bank is now only getting overnight funding. Whether or not the concern is about solvency, pricing, or the buyers own liquidity, the impact is the same. Less liquidity in the marketplace.

If an established bank is having trouble raising capital, how likely are they to bend for their own customers? After all, where are those borrowing customers going to go? Every other financial institution is seeing the same data.

On the private equity side, investment bankers will now admit that most of the unannounced large M&A deals they were working on cannot possibly proceed, at least for the time being. With US$200 billion of debt still to be raised for previously announced private equity transactions, why get in the back of that queue?

One private equity fund manager described the situation this way: “we are going to take some time off now, as the debt we needed to raise for the two deals we were working on has just gone away. There is just no debt available now. None.”

An example of the mood is seen in how the lead banks on one US$200 million deal are dealing with the lack of syndication players: the lead lenders are offering to pay the break fee on the deal on behalf of their client (the fee that the buyer owes the would-be seller if they don’t close on the definitive agreement) as that would be cheaper than the loss they’ll take on syndicating the US$200 million loan.

Wells Fargo pulls the plug on funding on their wholesale nonprime lending business (as predicted in our post “Next stop: Corporate Subprime?“, March 25-07), banks shorten the leash on each other, hedge funds that stepped up on bridge loan comitments for U.S. private equity deals are being asked – to their surprise and horror – to fund their promises…. The pain is across the board.

It will all eventually end, of course. It always does. The debt markets will return. Just not this coming week.

In the meantime, with Fortress (FIG:NYSE) and Blackstone (BX:NYSE) shareholders down on their luck, the firm that was hired to create the KKR initial public offering tombstone should likely be informed that their services won’t be needed for a few months yet.

At our end, we closed our 11th deal in as many months on Friday and have another closing later this week (knock on wood). If you’re having troubles with your lender, big or small, give us a call.

MRM